It is often the case that an issuing bank will nominate another bank (a reimbursing bank) to provide reimbursement on its behalf.
The use of a reimbursing bank, which is very often located in the country of the currency of the documentary credit, allows an issuing bank to utilise foreign currency held in its account with that bank rather than facing the exchange rate risks associated with converting local currency to a foreign currency on a payment-by-payment basis.
In such circumstances, the issuing bank, at the time of issuing its documentary credit, should send a reimbursement authorisation to the reimbursing bank instructing it to reimburse the claiming bank (a nominated bank).
The reimbursing bank will only pay a complying claim if funds are available in the account of the issuing bank, or where there is a sufficient overdraft facility in place, unless it has issued its own Irrevocable Reimbursement Undertaking (IRU). Such IRU irrevocably binds the reimbursing bank to honour a complying demand.
A reimbursing bank has no concern with regard to the documents that are presented under the documentary credit and whether they are compliant or not.
The reimbursement process is entirely separate from that of the documentary credit.
Bank-to-Bank reimbursements may be made subject to the Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, ICC Publication No. 725 ("URR 725") or UCP 600 sub-article 13 (b).
UCP 600 article 13 addresses how the applicability of URR 725 is to be indicated, or the process to be followed if URR 725 does not apply.
This subject is covered in far greater detail within our training module ‘bank-to-bank reimbursements in practice' which can be purchased at https://www.tradefinance.training/shop/